“Principles of Finance: Complete Notes &
Exam Guide for Business Students”
Table of Contents
1. Introduction to Accounting
2. Basic Accounting Principles
3. Source Documents and Books of Original Entry
4. Ledger Accounts
5. Trial Balance
6. Bank Reconciliation
7. Depreciation and Fixed Assets
8. Final Accounts (Trading, Profit & Loss, Balance Sheet)
9. Control Accounts and Error Correction
10. Ratio Analysis
Introduction to Accounting
What is Accounting?
Accounting is the systematic recording, measuring, and communication of financial
information about a business. It helps business owners, managers, and stakeholders make
informed decisions.
Key Definitions
Assets: Resources owned by a business (e.g., cash, equipment, stock)
Liabilities: Debts owed by a business (e.g., loans, creditors)
Capital: Owner's investment in the business
Revenue: Income earned from business activities
Expenses: Costs incurred in running the business
The Accounting Equation
Assets = Capital + Liabilities
This fundamental equation must always balance. Every transaction affects at least two items
in the equation.
Example
If a business has:
Cash: £5,000
Equipment: £3,000
, Bank loan: £2,000
Owner's capital: £6,000
Check: Assets (£8,000) = Capital (£6,000) + Liabilities (£2,000) ✓
Types of Business Organizations
Sole Trader: Business owned by one person
Partnership: Business owned by 2-20 people
Limited Company: Separate legal entity from its owners
Practice Questions
Question 1: A business has assets of £15,000 and liabilities of £6,000. Calculate the capital.
Answer: Capital = Assets - Liabilities = £15,000 - £6,000 = £9,000
Question 2: List three examples each of assets and liabilities. Answer: Assets: Cash, Stock,
Equipment. Liabilities: Bank loan, Creditors, Mortgage.
2. Basic Accounting Principles
Key Accounting Principles
Business Entity Principle
The business is treated as separate from its owner. Personal transactions should not be mixed
with business transactions.
Going Concern Principle
It is assumed the business will continue operating for the foreseeable future.
Consistency Principle
The same accounting methods should be used from one period to another.
Prudence (Conservatism) Principle
Losses should be recorded as soon as they are anticipated, but profits should only be recorded
when realized.
Materiality Principle
Only items significant enough to affect decision-making need detailed recording.
Accruals Principle
, Revenue and expenses should be recorded when they occur, not when cash is received or
paid.
Classification of Accounts
1. Assets: Can be Current (short-term) or Fixed (long-term)
2. Liabilities: Can be Current (due within 1 year) or Long-term
3. Capital: Owner's equity in the business
4. Revenue: Income from sales and services
5. Expenses: Costs of running the business
Double Entry Bookkeeping
Every transaction has two effects and must be recorded twice:
Debit: Left side of an account
Credit: Right side of an account
Rule: For every debit entry, there must be an equal credit entry.
Debit and Credit Rules
Assets: Increase with Debit, Decrease with Credit
Liabilities: Increase with Credit, Decrease with Debit
Capital: Increase with Credit, Decrease with Debit
Revenue: Increase with Credit, Decrease with Debit
Expenses: Increase with Debit, Decrease with Credit
Practice Questions
Question 1: What principle requires business transactions to be kept separate from personal
transactions? Answer: Business Entity Principle
Question 2: A business buys equipment for £2,000 cash. Show the double entry. Answer:
Debit Equipment £2,000, Credit Cash £2,000
3. Source Documents and Books of Original Entry
Source Documents
These are the original papers that provide evidence of transactions.
Types of Source Documents
1. Sales Invoice: Sent by seller to buyer for goods sold on credit
2. Purchase Invoice: Received by buyer from seller for goods bought on credit
3. Credit Note: Issued when goods are returned or allowances given
Exam Guide for Business Students”
Table of Contents
1. Introduction to Accounting
2. Basic Accounting Principles
3. Source Documents and Books of Original Entry
4. Ledger Accounts
5. Trial Balance
6. Bank Reconciliation
7. Depreciation and Fixed Assets
8. Final Accounts (Trading, Profit & Loss, Balance Sheet)
9. Control Accounts and Error Correction
10. Ratio Analysis
Introduction to Accounting
What is Accounting?
Accounting is the systematic recording, measuring, and communication of financial
information about a business. It helps business owners, managers, and stakeholders make
informed decisions.
Key Definitions
Assets: Resources owned by a business (e.g., cash, equipment, stock)
Liabilities: Debts owed by a business (e.g., loans, creditors)
Capital: Owner's investment in the business
Revenue: Income earned from business activities
Expenses: Costs incurred in running the business
The Accounting Equation
Assets = Capital + Liabilities
This fundamental equation must always balance. Every transaction affects at least two items
in the equation.
Example
If a business has:
Cash: £5,000
Equipment: £3,000
, Bank loan: £2,000
Owner's capital: £6,000
Check: Assets (£8,000) = Capital (£6,000) + Liabilities (£2,000) ✓
Types of Business Organizations
Sole Trader: Business owned by one person
Partnership: Business owned by 2-20 people
Limited Company: Separate legal entity from its owners
Practice Questions
Question 1: A business has assets of £15,000 and liabilities of £6,000. Calculate the capital.
Answer: Capital = Assets - Liabilities = £15,000 - £6,000 = £9,000
Question 2: List three examples each of assets and liabilities. Answer: Assets: Cash, Stock,
Equipment. Liabilities: Bank loan, Creditors, Mortgage.
2. Basic Accounting Principles
Key Accounting Principles
Business Entity Principle
The business is treated as separate from its owner. Personal transactions should not be mixed
with business transactions.
Going Concern Principle
It is assumed the business will continue operating for the foreseeable future.
Consistency Principle
The same accounting methods should be used from one period to another.
Prudence (Conservatism) Principle
Losses should be recorded as soon as they are anticipated, but profits should only be recorded
when realized.
Materiality Principle
Only items significant enough to affect decision-making need detailed recording.
Accruals Principle
, Revenue and expenses should be recorded when they occur, not when cash is received or
paid.
Classification of Accounts
1. Assets: Can be Current (short-term) or Fixed (long-term)
2. Liabilities: Can be Current (due within 1 year) or Long-term
3. Capital: Owner's equity in the business
4. Revenue: Income from sales and services
5. Expenses: Costs of running the business
Double Entry Bookkeeping
Every transaction has two effects and must be recorded twice:
Debit: Left side of an account
Credit: Right side of an account
Rule: For every debit entry, there must be an equal credit entry.
Debit and Credit Rules
Assets: Increase with Debit, Decrease with Credit
Liabilities: Increase with Credit, Decrease with Debit
Capital: Increase with Credit, Decrease with Debit
Revenue: Increase with Credit, Decrease with Debit
Expenses: Increase with Debit, Decrease with Credit
Practice Questions
Question 1: What principle requires business transactions to be kept separate from personal
transactions? Answer: Business Entity Principle
Question 2: A business buys equipment for £2,000 cash. Show the double entry. Answer:
Debit Equipment £2,000, Credit Cash £2,000
3. Source Documents and Books of Original Entry
Source Documents
These are the original papers that provide evidence of transactions.
Types of Source Documents
1. Sales Invoice: Sent by seller to buyer for goods sold on credit
2. Purchase Invoice: Received by buyer from seller for goods bought on credit
3. Credit Note: Issued when goods are returned or allowances given
